Deck 19: Returns, Index Numbers, and Inflation

Question 1

The aggregate price index is used to represent relative price movements for a group of items.

Answer 1

True

Question 2

An unweighted price index for different types of properties will unfairly treat all property prices equally.

Answer 2

True

Question 3

The Laspeyres price index uses the quantities evaluated in the base period to compute the weighted aggregate price index.

Answer 3

True

Question 4

The Consumer Price Index (CPI) and the Producer Price Index (PPI) must always move in sync with each other.

Question 5

Index numbers provide direct comparisons of prices not only with respect to the base year, but also between non-base years.

Question 6

Rates of return expressed in nominal terms do not represent a true picture because they are not adjusted for inflation.

Question 7

The Laspeyres and Paasche indices tend to differ when the length of time between the periods increases since the relative quantities of items adjust to the changes in consumer demand over time.

Question 8

The ________ equation is a theoretical relationship between nominal returns, real returns, and the expected inflation rate.

Question 9

Because both the Laspeyres and Paasche indices are weighted aggregate price indices, they will yield the same value for a given evaluation period.

Question 10

As long as an investor does not sell an asset, there is no capital gain or loss involved.

Question 11

If the nominal rate of return is positive, then the real rate of return must also be positive.

Question 12

The income component is ________ for stocks, interest for bonds, and rental income for a real estate investments.

Question 13

The only possible income from an investment is the direct cash payment from the underlying asset.

Question 14

The ________ component is the capital gain or loss resulting from an increase or decrease in the value of the asset.

Question 15

If the year 2000 is used as a base year and the value of the price index in 2001 is 105, it implies that there was a 5% increase in the price level in 2001.

Question 16

An index number is an easy-to-interpret numerical value that reflects a ________ change in price or quantity from a base price.

Question 17

Price indices are used to remove the effect of inflation so that business and economic time series can be evaluated in a more meaningful way.

Question 18

The weighted aggregate price index assigns a lower weight to the items that are sold in higher quantities.

Question 19

There is no need to have a constant base value for a price index.

Question 20

When the expected inflation rate is relatively low, a reasonable ________ to the Fisher equation is r = R - i.

Question 21

Emily Myers purchased a share of company X at $700 one year ago and earned a dividend of $50 during the year. The share is trading now at $850. Calculate Emily's return from investment if she sells her share at $850.

A) 7.14%
B) 21.43%
C) 28.57%
D) 14.29%

Question 22

The adjusted close price of a share is now $67. A year back, the adjusted close price of the same share was $50. What is the investment percent return for someone who holds 10 of these shares today?

A) 34%
B) 17%
C) 20%
D) 25.37%

Question 23

Which of the below is not required to compute an investment return?

A) Interest rate
B) Price of the asset at purchase
C) Price of the asset at sale
D) Distributed income

Question 24

Which of the following types of returns capture the changes in purchasing power?

A) Nominal returns
B) Real returns
C) Income yield
D) Capital gains yield

Question 25

A ________ series is obtained by adjusting the given time series for changes in prices, or inflation.

Question 26

If the average price for gasoline in 2001 and 2006 was $1.46 per gallon and $2.59, respectively, the simple price index for 2006 is ________%.

Question 27

Which of the following statements is true of investment returns?

A) A change in the price of the underlying asset usually has no impact on returns to investment.
B) Income yield always accounts for the bulk of the returns from an investment.
C) The higher the price of the asset during the time of purchase, the lower the returns from that investment.
D) The higher the income yield, the lower the overall returns from that investment.

Question 28

Joanna Robertson bought a share of XYZ Corp. at $200 last year. She was paid a dividend of $30 during the same year. However, the same share is trading at $280 this year. Calculate the investment percent yield if Joanna sells the share at $280.

A) 70%
B) 110%
C) 15%
D) 55%

Question 29

The ________ rate is the percentage rate of change of a price index over time.

Question 30

Joanna Robertson bought a share of XYZ Corp. at $200 last year. She was paid a dividend of $30 during the same year. However, the same share is trading at $280 this year. Calculate Joanna's income percent yield from holding the share for a year.

A) 15%
B) 40%
C) 55%
D) 30%

Question 31

Allen Gibbs purchased 50 shares of ABC Corp., each worth $110. If the price of the share increases to $135 after a year, which of the following will be the capital gain if Allen sells all his shares?

A) $1,250
B) $25
C) $6,750
D) $5,500

Question 32

Donna Warne purchased a share of company X at $700 one year ago. The share is now trading at $850. Calculate the percent capital gain if Donna sells her share at the current price.

A) 17.6%
B) 150%
C) 6.7%
D) 21.4%

Question 33

Which of the following correctly identifies the Fisher equation?

A) r = (1 + R) / (1 + i)
B) r = R / (1 + i)
C) 1 + r = R / (1 + i)
D) 1 + r = (1 + R) / (1 + i)

Question 34

Calculate the nominal percent return from an investment of $300 in a share whose price increases to $375 after a year.

A) 75%
B) 20%
C) 25%
D) 16.67%

Question 35

The ________ price index is used to represent relative price movements for a group of items.

Question 36

The Paasche index uses the ________ period quantities in deriving the weights.

Question 37

Joanna Robertson bought a share of XYZ Corp. at $200 last year. She was paid a dividend of $30 during the same year. However, the same share is trading at $280 this year. Calculate Joanna's capital gains percent yield if she sells the shares at $280.

A) 80%
B) 15%
C) 40%
D) 28.57%

Question 38

The ________ price index uses quantities evaluated in the base period to compute the weighted aggregate price index.

Question 39

Jack Simmons is expecting to earn a 0.34% return on his investment in a government bond that matures next year. If the inflation rate during the time of maturity is expected to be 7%, what will be the real rate of return from his investment?

A) 6.64%
B) - 3.36%
C) - 6.22%
D) 25%

Question 40

Which of the following investment options is the most profitable in percentage terms?

A) A government bond with a coupon payment of $10, purchased at $100 and sold at $90 after a year.
B) A government bond with a coupon payment of $15, purchased at $175 and sold at $155 after a year.
C) A share with a dividend payment of $5, purchased at $50 and sold at $60 after a year.
D) A Treasury bill purchased at $160 and sold at $175 after a year.

Question 41

Consider the following information about the price and the price index of a popular book over three years. What was the approximate price of the book in 2011?

A) $10
B) $10.80
C) $8.10
D) $10.69

Question 42

Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and is distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. Which of the following is the unweighted price index for the total price of three types of laptops in 2006, using 2005 as the base year?

A) 96.63
B) 103.48
C) 91.83
D) 100.96

Question 43

The price of a basket of goods in 2000 was $500. If the same basket cost $600 in 2002, identify the correct statement from the following.

A) The price index in 2002 must have been 100 points higher than in 2000.
B) The price increase between 2000 and 2002 was 10%.
C) If 2000 is considered the base year, then the price index in 2002 must have been 120.
D) If 2002 is considered the base year, then the price index in 2000 must have been 70.

Question 44

Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. If 2005 is used as the base year, which of the following statements about the prices of these laptops is true?

A) The prices increased by about 4.8% between 2006 and 2007.
B) The prices were about 8.17% lower in 2007 than in 2005.
C) The prices increased by about 3.36% from 2005 to 2006.
D) The increase in the price of firm C's laptop outweighed the fall in the prices of the others so that the overall index for 2006 was greater than 100.

Question 45

The following table provides the values of the simple price index for watches in a country. If the base year is revised from 2006 to 2007, which of the following is the updated index for 2008?

A) 113.5
B) 96.77
C) 95.24
D) 103.33

Question 46

Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period. What nominal rate of return will Hugh earn if he invested in option 1?

A) 0.79%
B) 3.22%
C) 0.32%
D) 6.67%

Question 47

If the price index for a particular year is 75, it implies that ________.

A) prices have increased by 7.5% over the base year
B) prices have increased by 0.75% over the base year
C) prices have decreased by 0.25% compared to the base year
D) prices have decreased by 25% compared to the base year

Question 48

Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period. Which of the following statements regarding these investment options is true?

A) Investment option 1 has the highest nominal rate of return.
B) The expected percent rate of interest during the time of maturity of investment option 3 is 1.48%.
C) Investment option 3 has the highest expected inflation rate and the lowest real rate of return.
D) Adjusted for inflation, investment option 1 is the best choice for Hugh.

Question 49

Consider the following information about the price and the price index of a popular book over three years. What was the price index for this book in 2010?

A) 72
B) 92.59
C) 107.2
D) 108

Question 50

Consider the following data on the prices of three items, A, B, and C, from 2000 through 2002. If the price of item C in 2002 was 210 instead of 207, which of the following is the unweighted aggregate price index for 2002 for the three items, using 2000 as the base year?

A) 98.09
B) 100.45
C) 102.03
D) 101.94

Question 51

Timothy Keating invested $120 in buying a share of company X in June last year. Although the company had announced that it will not pay any dividend, the price of this share has increased over the last few months and is expected to go up to $140 by June this year. If the expected annual inflation rate in June this year is 5%, calculate Timothy's real rate of return from this investment if he sells the share at $140.

A) 11.11%
B) 14.29%
C) −22.22%
D) −10%

Question 52

Consider the following data on the prices of three items, A, B, and C, from 2000 through 2002. Compute the unweighted price index for the three items for 2002, using 2000 as the base year.

A) 98.26
B) 98.48
C) 109
D) 101.46

Question 53

Hugh Wallace has the following information regarding three investment options. Each investment option involves the same one-year period. What real percent rate of return will Hugh earn if he invests in option 2?

A) −2.5%
B) 4.58%
C) 0.96%
D) −3.37%

Question 54

Consider the following information about the price and the price index of a popular book over three years. If the price index in 2011 was 95, which of the following is the percent change in the price of the book between 2010 and 2011?

A) -12.04%
B) -5%
C) -2.53%
D) -13%

Question 55

If the price index for a particular year is 110, it implies that ________.

A) prices have increased by 11% over the base year
B) prices have increased by 10% over the base year
C) prices have increased by 1.1% over the base year
D) prices have increased by 0.10% over the base year

Question 56

Consider the following data on the prices of three items, A, B, and C, from 2000 through 2002. Which of the following is the unweighted aggregate price index for the three items for 2002, using 2001 as the base year?

A) 98.48
B) 101.54
C) 109.5
D) 102.58

Question 57

If p_t is the price of good X in period t, and p₀ is the base period price, which of the following is the equation for a simple price index for good X?

A) × 100
B) × 100.
C) × 100.
D) p_t - p₀ × 100.

Question 58

Consider the following information about the price and the price index of a popular book over three years. Which of the following is the correct statement?

A) The price of the book increased by 3.11% between 2010 and 2011.
B) If 2011 was the base year, the price index for the book in 2009 would have been 90.
C) Between 2009 and 2011, the price of the book went up by 11.11%.
D) If 2010 was the base year, the price index in 2009 would have been 99.28.

Question 59

Consider the following data on the prices of three items, A, B, and C, from 2000 through 2002. Compute the unweighted price index for the three items for 2000, using 2001 as the base year.

A) 100.08
B) 98.56
C) 100.85
D) 99.92

Question 60

Consider the following information about the price and the price index of a popular book over three years. If the price index in 2011 was 95 instead of 111.11, it would imply that ________.

A) the price of the book in 2011 was 16.11% lower than its price in 2009
B) 2011 would be considered as the base year
C) the price of the book in 2011 was 5% lower than its price in 2009
D) the price of the book in 2011 would be $4

Question 61

Katie Jones started her career with an annual salary of $30,000 in 2006. Five years later, in 2011, her salary had increased to $55,000 a year. If the values of the CPI (with a base of 1982−1984) for 2006 and 2011 are 201.6 and 224.9, respectively, compute the increase in Katie's real income.

A) 64.34%
B) 83.33%
C) 105.31%
D) 164.34%

Question 62

Three firms, X, Y, and Z, operate in the same industry, although their products have different features and are priced differently. The following table provides the prices and the quantities sold (in units) during the period 2000 to 2002. Which of the following is the Paasche price index for 2002 if the base period is 2000 and the current period is 2002?

A) 94.11
B) 106.26
C) 130
D) 106.07

Question 63

Which of the following is true about the comparison between the CPI and the PPI?

A) Both indices are based on the same basket of goods and services.
B) Sales and excise taxes are included in the PPI, but they are not included in the CPI.
C) The PPI is more commonly used to adjust wages for changes in the cost of living than the CPI.
D) Unlike the CPI that uses prices people pay, the PPI uses the prices measured at the wholesale level.

Question 64

Which of the following is the correct expression for the Laspeyres price index?

A) × 100
B) × 100
C) × 100
D) × 100

Question 65

Jones Inc., a company manufacturing drills, earned a revenue of $5 million in 2011. This was 6% more than their revenue in 2009. The CPI for 2009 and 2011 was 115 and 122 respectively, while the PPI for 2009 and 2011 was 110 and 114 respectively. Which of the following accurately reflects the real growth in revenues between 2009 and 2011?

A) 6%
B) 2.65%
C) 0.28%
D) 10.25%

Question 66

The following table shows the value of CPI for three years in a country. Which of the following is the annual inflation rate for 2005?

A) 1.46%
B) 3.36%
C) 4.87%
D) 1.8%

Question 67

Which of the following statements is true of the CPI?

A) It uses the same basket of goods and services as the PPI.
B) The quantities of items in the current year are used for computing the weights for the index.
C) It is an unweighted price index used to measure inflation.
D) It is based on the prices paid by urban consumers for a representative basket of goods and services.

Question 68

When Dana Roberts started her job as a librarian two years ago, her annual salary was $40,000. Although she is very good at her job and is now earning 10% more than what she started with, she notices that new hires in the same field are being offered $43,000 as an annual salary this year. Which of the following statements is most likely to be true?

A) Dana is earning less than $43,000 this year.
B) Real income for librarians in this country has increased, on an average, by $3,000 during the last two years.
C) If inflation in the current year is very high, then it is possible that Dana was better off with $40,000 two years back than the new hires are with a salary of $43,000 today.
D) Adjusted for inflation in the current year, it is likely that Dana's income this year is lower than the income of the new hires.

Question 69

Which of the following correctly identifies the expression for calculating the inflation rate for period t, based on the CPI?

A) i_t =
B) i_t = × 100
C) i_t =
D) i_t = × 100

Question 70

The following table shows the value of CPI for three years in a country. Which of the following is the annual inflation rate for 2004?

A) 4%
B) 1.46%
C) 3.36%
D) 4.87%

Question 71

Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. Suppose this data was collected from a particular town, where people have a preference for firm C's laptops. If 2005 is used as the base year, which of the following statements will be true?

A) The unweighted price index for 2007 understates the fall in the prices of laptops.
B) The unweighted price index for 2006 overstates the fall in the prices of laptops.
C) The unweighted price index should only use the data for laptops produced by firms A and B to provide an accurate picture of the change in prices.
D) The unweighted price index will better reflect the change in prices over these years than a weighted price index.

Question 72

Three firms, X, Y, and Z, operate in the same industry, although their products have different features and are priced differently. The following table provides the prices and the quantities sold (in units) during the period 2000 to 2002. Compute the Paasche price index for 2001 if the base period is 2000 and the current period is 2002.

A) 105.12
B) 94.11
C) 92.85
D) 98.92

Question 73

Which of the following statements is true about the comparison between the Laspeyres and Paasche indices?

A) The Laspeyres index is more expensive to compute than the Paasche index.
B) The data requirements are more stringent for the Laspeyres index than for the Paasche index.
C) Unlike the Laspeyres index, the Paasche index incorporates current expenditure patterns of consumers.
D) Unlike the Paasche index, the Laspeyres index requires that the weights be updated each year and the index numbers be recomputed for all of the previous years.

Question 74

Three firms, X, Y, and Z, operate in the same industry, although their products have different features and are priced differently. The following table provides the prices and the quantities sold (in units) during the period 2000-2002. Which of the following is the Laspeyres price index for 2002, using 2000 as the base year?

A) 106.07
B) 106.3
C) 94.28
D) 94.08

Question 75

Which of the following statements is true about the Laspeyres and Paasche indices?

A) As long as the evaluation period is the same, the two indices usually yield the same value.
B) The difference in the values of the two indices, if any, can usually account for the varying price levels across periods.
C) The Laspeyres price index uses the current period quantities as weights, as opposed to the base period quantities used by the Paasche price index.
D) The greater the length of time between periods, the higher the chances of variation between the values of the two indices.

Question 76

Gulten started her career with an annual salary of $82,000 in 2006. Five years later, in 2011, her salary had increased to $85,000 a year. If the values of the CPI (with a base of 1982−1984) for 2006 and 2011 are 201.6 and 224.9, respectively, compute the increase in Gulten's real income.

A) −7.08%
B) 3.66%
C) 15.68%
D) 92.92%

Question 77

Three firms, X, Y, and Z, operate in the same industry, although their products have different features and are priced differently. The following table provides the prices and the quantities sold (in units) during the period 2000 to 2002. Which of the following is the Laspeyres price index for 2001, using 2000 as the base year?

A) 95.64
B) 113.60
C) 104.56
D) 105.19

Question 78

A Paasche index with updated weights ________.

A) is likely to produce a lower estimate than a Laspeyres index when prices are increasing
B) uses the current period quantities as weights as opposed to the base period quantities used in the Paasche index, which does not use updated weights
C) is likely to produce a lower estimate than a Laspeyres index when prices are decreasing
D) accounts for inflation but fails to account for changing consumption patterns over time

Question 79

Firms A, B, and C operate in the market for computers. Each firm's product is popular in the market and distinct from what the other firms offer. The following table shows the prices of laptops from 2005 through 2007. If 2006 is used as the base year, which of the following statements is true?

A) The prices in 2007 were 5.02% lower than the prices in 2005.
B) The price index for 2005 will be 100, as per the unweighted price index.
C) The unweighted price index for 2007 suggests that laptop prices were 8.17% lower than the prices in 2006, as per the unweighted price index.
D) The laptop prices in 2005 were 3.48% higher than the prices in 2006, as per the unweighted price index.

Question 80

When a given time series is adjusted for changes in prices, it is called a(n) ________.

A) deflated series
B) unweighted series
C) nominal series
D) cyclical series